Europe’s solar industry at war

When Angela Merkel, Germany’s chancellor, arrived in Beijing on 30 August last year, rumours were swirling that the European Commission was about to launch an investigation into China’s solar-panel industry. Merkel took up the issue publicly, saying that it would be best to avoid a trade war. For a moment, the concerns of the Chinese – and in Europe’s solar industry – were allayed. But the Commission pushed on regardless, announcing an investigation on 6 September.

The Commission says it is legally obliged to open an investigation if – as in this case – an industry provides evidence that products are being dumped. Critics of the complaint, which was lodged by ProSun, the alliance of 44 or so companies, suggest it could have questioned the submission more rigorously. But, either way, the European Commission is now at the centre of a trade case that is massive in financial terms – China sold €21 billion of solar panels and components to the EU in 2011 – and vitally important in policy terms, since both for the EU and for China clean energy is a priority.

History might suggest that ProSun starts with an advantage: last May, the United States slapped tariffs on Chinese solar panels (in the case of some companies, the duties were 200%). But opponents of the complaint – including the 60 European companies from across the industry that attended a Commission hearing on Monday (18 February) – are pinning their case on a clause not in US trade policy: EU trade regulations recognise that ‘the Community interest’ – the EU’s greater good – is an argument for not imposing penalties, even if someone’ interest were damaged.

Just how much damage Chinese manufacturers might have caused – or could now cause – to the European industry is a point of contention. ProSun argues that Europe could lose hundreds of thousands of jobs if no action is taken. “The numbers in that study are bullshit,” is, however, the assessment of Thorsten Preugschas of Soventix, a German builder and operator of solar plants.

Instead, Preugschas points to a study presented to the Commission on Monday by the Swiss research company Prognos. Duties would reduce demand, with knock-on effects down to local installers, the most labour-heavy part of the industry.

Depending on whether duties on solar modules were 20% or 60%, Prognos believes that 145,000 to 269,800 jobs could be lost over three years and the European economy would lose an aggregate of €18.4bn-€33.8bn in valued added.

Some parts of the industry might gain – but only enough to add 15,000-58,000 jobs. Duties of 60% (about the level that ProSun is asking for) would halve the market.

The impact would be compounded if China were to retaliate. There is widespread expectation that such retaliation would be rapid, reinforced by China’s decision in November to file a case with the World Trade Organization accusing some EU states of favouring EU producers of solar-energy equipment.

However, Germany’s Wacker Chemie, a producer of polysilicone, a high-quality energy conductor, is more concerned about the impact on the market.

“Duties would result in long-term economic losses for the EU economy that would be much greater than any short-term benefit for the small number of EU wafer, cell and module producers,” its chief executive, Rudolf Staudigl, says.

For opponents of duties, to shrink a strategic market and risk a trade war is a high price to pay for an investigation based on a questionable price calculation: in assessing whether prices are at ‘dumping’ levels, the Commission uses the US as an ‘analogue’, or point of reference – a mistake, some argue, because the US market is small.

There is another ‘community interest’ that they believe is at risk. After years of subsidies, the solar-energy industry is now competitive with other energy industries.

“Grid parity is almost here and we are looking at pulling back from that golden moment,” says Jodie Roussel of Trinar Solar, a multinational with Chinese origins. It would be perverse, she and others argue, for the EU to make it harder to reach its goal of generating 20% of its energy from renewable sources by 2020.

The Commission is also considering whether China is subsidising its solar-panel producers unfairly. The two aspects of the investigation may be separate, but in assessments both the dumping and subsidy aspects are partly shaped by the history of how the European and Chinese solar industries emerged and the role played by subsidies.

In Europe, countries eager to nurture a nascent clean-energy industry subsidised solar-panel producers heavily – mainly through ‘feed-in tariffs’ that guaranteed prices for solar power. In China, a centrally dictated demand for cleaner energy triggered a wave of investment, often involving members of local political elites. Both in China and the EU, the solar-energy markets and industries have matured dramatically. As well as making solar energy competitive with other sources, price drops are squeezing margins in Europe, taking some firms to the wall.

To cope with competition, price volatility and policy uncertainty, those parts of the European industry exposed to international competition are internationalising their businesses. In China, the market is also consolidating and a “wild East” of small, cheap producers is being tamed.

One side-effect is that, to recoup some of their investment, some producers have been selling off stock at low prices, members of the European industry acknowledge.

But Soventix’s Thorsten Preugschas suggests it would be “unfair” to ignore the role that the EU’s own subsidies played in China. “We [the EU] created this market” and “we screamed for [China] to get volumes in place”.

If China has invested more heavily – and created economies of scale – to ensure that its producers’ costs are low, they should not be blamed. From this perspective, in imposing duties, the Commission would be fighting a battle that has already been lost, and in the process would jeopardise victories that European companies could still win, in higher-value parts of the industry.

Many in the industry now describe their business as a ‘financial product’. That is a view of subsidies shaped by the industry’s history. But what if China is now using subsidies in a different way, not to nurture a domestic industry that is important for climate-policy reasons, but, rather, for use as an offensive weapon to conquer foreign markets?

Paulette Vander Schueren, a lawyer with Mayer Brown, says that the scope of the Commission’s investigation into subsidies is broad enough to include trade credits. If the Commission decides that trade credits and other easy money are part of a strategic industrial policy, the debate about the two cases could be re-framed as a battle over what is in the EU’s greater interest – to leave the solar industry alone, or to use these cases to halt aggressive policies by China.

The Commission has until the end of this year to decide whether China is dumping solar panels and offering subsidies. Opponents of duties are suggesting at least three options.

Soventix’s Preugschas argues that the market should be left to do its work. Wacker Chemie believes that the EU should ask the World Trade Organization (WTO) to organise a formal dialogue with China on developing the global renewable-energy market. SEMI, a global association for the micro- and nano-electronics industries, thinks that the solar industry, rather than governments, should push for a global solution.

But it could be that the case will become part of a broader debate about how to bring China to the negotiating table on bigger-picture trade issues.

The EU has long wanted to persuade China to submit its trade credits to the disciplines of the Organisation for Economic Co-operation and Development. The possibility that the WTO could in December 2016 recognise China as a market economy – making it harder to bring anti-dumping measures – could add urgency to trade strategists’ thinking.

The stakes are high. Soventix’s Preugschas suggests they are extremely high: “Will there be a dawn of a solar century or a severe consolidation of the market?”

What is certain is that until the end of the year, when the Commission will announce its decisions in both the dumping and subsidy cases, a fast-changing and volatile industry will be unsettled by two big questions: What might the EU want to achieve with this case? And how significant will the EU’s market be in the next few years?